Filed by Public Storage, Inc.
Pursuant to Rule 165 and Rule 425(a) under the
United States Securities Act of 1933, as amended
Subject Company: Shurgard Storage Centers, Inc.
Commission File No. 001-11455
Date: August 1, 2005
The following is a transcript of a conference call which is accessible on Public
Storage's website.
PUBLIC STORAGE, INCORPORATED
MODERATOR: CLEM TENG
AUGUST 1, 2005
9:00 AM PST
Operator: Good morning. My name is Kelly and I will be your
conference facilitator today. At this time, I would like
to welcome everyone to the Public Storage Second Quarter
Earnings call. All lines have been placed on mute to
prevent any background noise.
After the speakers' remarks, there will be a question and
answer period. If you would like to ask a question during
this time, simply press star, then the number 1 on your
telephone keypad. If you would like to withdraw your
question, press star, then the number 2 on your telephone
keypad.
Thank you. Mr. Teng, you may begin your conference.
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Clem Teng: Good morning. I'm Clem Teng, Vice President of Investor
Services for Public Storage. Joining me this morning are
Ron Havner, CEO; John Reyes, CFO; John Graul, President of
Self-Storage Operations; David Doll, President of Real
Estate Operations; and Jack Baumann, our Chief Legal
Officer.
As you are aware, on Friday night, we released our second
quarter earnings and this morning we announced that we had
made a proposal to merge with Shurgard. Our agenda for the
call this morning will be to first review our second
quarter earnings and then Ron will discuss the proposal to
Shurgard.
Before we begin with the formal remarks, I would like to
provide the forward-looking statement warning. This
conference call will contain forward-looking statements
within the meaning of Section 27-A of the Securities Act
of 1933 and Section 21-E of the Securities Exchange Act of
1934. These forward-looking statements are subject to a
number of risks and uncertainties, many of which are
beyond Public Storage's control that could cause actual
results to differ materially from those set forth in or
implied by such forward-looking statements.
All statements other than statements of historical facts
included in this conference call are forward-looking
statements. All forward-looking statements speak only as
of the date of this conference call. Public Storage
undertakes no obligation to update or revise any
forward-looking statements whether as a result of new
information, future events, or otherwise. There can be no
guarantee that any transaction between Public Storage and
Shurgard will occur.
In addition to the risks and uncertainties of ordinary
business operations, the forward-looking statements of
Public Storage made on this conference call are also
subject to the following risks and uncertainties: Public
Storage's ability
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to successfully integrate the operations of Shurgard and
assumptions with respect to the benefits to be realized
from a potential transaction with Shurgard, future
revenues of Shurgard and Public Storage, the expected
performance of Shurgard and Public Storage, and the
expected cash flows of Shurgard and Public Storage.
For additional information about risks and uncertainties
that could adversely affect Public Storage's
forward-looking statements, please refer to Public
Storage's Annual Report on Form 10-K for the fiscal year
ended December 31, 2004.
We will also provide certain non-GAAP financial measures.
A reconciliation to GAAP of these non-GAAP financial
measures is included in our press release which can be
found at our Website at www.publicstorage.com. A slide
presentation on our proposal to Shurgard can also be found
at our Website.
As a reminder, our press release and an audio Webcast
replay of this conference call are available at our
Website and complete financial information will be
available in our 10-Q, which will be filed shortly with
the Securities and Exchange Commission.
With that, I will now turn the call over to John Reyes.
John Reyes: Thank you, Clem, and good day to everyone. As reported in
Friday's press release, Public Storage achieved solid
second quarter operating results. Net income for the
quarter rose to 47 cents per share compared to 37 cents
per share for the same period of 2004, representing an
increase of 27% or 10 cents per share.
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Funds from operations increased to 90 cents per share
compared to 77 cents per share in the same quarter last
year, representing an increase of 17% or 13 cents per
share. The 13-cent per share increase primarily resulted
from improved same-store operations which contributed 7
cents, development and acquisition activities that added 3
cents, our ancillary operations added 2 cents, and the
benefit from refinancing higher rate preferred securities
with lower rate preferred securities which added 1 cent
per share.
Virtually all the key operating metrics for same stores
improved on a year-over-year comparison. Revenues grew by
4.7% driven primarily by our pricing and media activities.
These activities enabled us to increase effective rents by
3.8% and average occupancy by 70 basis points for the
quarter.
The growth in our operating expense moderated to only a 1%
increase for the quarter. Our management team has worked
hard to control these expenses and John Graul will speak
in detail on this positive trend in a few minutes.
Net operating income increased a solid, 6.7%, as our gross
margins improved to 66.8% for the quarter compared to
65.6% in the same quarter of 2004.
Overall, this performance continues the positive operating
trends that we've been experiencing over the past several
quarters. Going into the third quarter, our same-store
facilities are well positioned for further growth.
Occupancy levels are approximately 1% higher and in-place
rents are approximately 3.3% higher at the end of June
2005 as compared to June 2004.
With respect to the balance of our self-storage assets,
which consists primarily of our development and
acquisition properties, revenues for the quarter increased
$32 million - increased to $32 million compared to $19
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million from the second quarter of 2004. Net operating
income for the quarter rose to $19 million as compared to
$11 million for the same period last year, much of this
growth coming from our 2004 and 2005 acquisitions.
We expect that both our development and acquisition
facilities will continue to provide growth in the quarters
to come as these properties continue to reach stabilized
occupancy levels as well as stabilized market rental
rates. For the quarter, these facilities in aggregate
provided an annualized yield of approximately 6.1% on a
cost base of approximately $858 million.
From a balance sheet perspective, we continue to maintain
our strong financial position. Our cash balance at June
30th totaled approximately $390 million. This balance was
partially built up by our capital raising activities as
well as retained operating cash flow.
For the first six months of this year, total distributions
paid to our common shareholders is approximately $54.3
million - excuse me - 54.3% of funds available for
distribution, down from 66.9% for the same period last
year. As a result, retained operating cash flow increased
significantly to $97.5 million for the first six months of
this year compared to $56.9 million for the same period
last year. This is after the payment of dividends and
capital expenditures.
Our fixed charge coverage ratio continues to improve. For
the first six months of 2005, the ratio was a solid 3.4
times, giving us the capacity to raise significantly more
preferred stock that's needed to fund our investing
activities.
Our next opportunity to call another series of preferreds
will be in December and will be redeemable in January of
2006. This preferred series, or 8.6% Series Q, has a
redemption value of $173 million. If called - it is
expected
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that we will fund the redemption with existing cash on
hand. In addition, the EITF Topic D-42 charge will be
approximately $5.6 million and will be recorded during the
fourth quarter of 2005.
In the second half of 2006, we have approximately $650
million of preferred stock that we can redeem, which has a
weighted average rate of 8%. We are continuing to monitor
the capital markets for opportunities to prefund these
redemptions which may create some short-term earning
dilutions for long-term improvement in earnings power.
Lastly, as we disclosed last quarter, in November of this
year, our partner in our development joint venture that
was formed in 1999, may exercise its option to exit the
partnership. If exercised we intend to acquire our
partner's interest, which is estimated at $105 million. We
are currently in negotiations with them to acquire this
interest.
With that, let me turn it over to John Graul.
John Graul: Thanks, John. Let me go back to an area that John Reyes
highlighted earlier with respect to operating expenses.
Our team has been focusing on operational excellence and
we are beginning to realize the impact of these efforts in
our overall expense controls. I will address briefly a few
of the initiatives we established last year and how we are
beginning to benefit from them.
The first initiative involved the managing of our largest
controllable expense item, payroll costs. Our first task
was to understand the time and effort needed to
efficiently operate the properties. We accomplished this
by developing a transaction-based staffing model, which is
the basis for all of our labor scheduling.
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The result for the second quarter was a 1% reduction in
labor hours or almost 10,000 hours compared to the same
period last year. For the six months, the reduction in
same-store labor hours was almost 1.7% or 45,000 hours
from the same period a year ago. We expect this downward
trend in hours to partially offset the increase in wage
rates.
Also, during the second quarter we completed two other
initiatives that we believe will have a long-term positive
impact on our operations. First, we have completed asset
plans on all of our properties, which will enable us to
better plan and effectively manage our future cap ex and
R&M expenditures. Our objective is to improve the overall
maintenance standards of the property and to effectively
manage costs.
Secondly, we completed an upgrade to our WebChamp
operating system and has greatly increased capacity. With
this upgrade, we can significantly increase the number of
properties in our system.
Overall, we are encouraged by our operating results. The
various initiatives, which are intended to create
standardization and operating efficiency, are beginning to
show in our bottom line results.
Next, with respect to our media program, you've heard Ron
comment during the last couple of quarters that we were
disappointed with move-in activity, which was declining
while media spending was increasing. This resulted in
customer acquisition costs moving above $150, up from $130
in 2003. Part of this was attributable to our efforts to
improve the weighted average value of new customers
through our media program.
Starting in April of this year, we shifted back to our
more traditional media mix and modified our promotional
and pricing programs to drive customer value. Results this
quarter are encouraging as move-in volume and our
same-store properties modestly exceeded the prior period,
the first such improvement in over a year. In addition,
move-out ratios continued to improve.
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Combined, this resulted in positive absorption of 18,700
customers in the same-store pool for the second quarter as
compared to 11,300 last year. We are still experimenting
and refining our media program, our customer research, and
leveraging our WebChamp database.
With respect to our same-store properties, going into the
second half of the year, occupancy is 100 basis points
higher than last June with higher in-place rents. If
you'll recall, last year we did not use media in August
due to the Olympics or in November due to the election.
We expect to be on TV with our traditional programs each
month for the balance of the year, although the markets
and frequency will vary. Media costs will continue to be
the most volatile expense component, which we expect to be
higher than last year.
Finally, here is an overview of what we are seeing in our
largest markets. For the ten states with the greatest
concentration of public storage same-store facilities, the
average occupancy for the second quarter was 92.1% with a
range of 93.4% at the high and 90.6% at the low end. This
compares to a 91.4% average last year with a range of
94.8% to 90.5%. The softest state in terms of occupancy
continues to be properties located in Texas.
Now let me turn it over to David Doll.
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David Doll: Thank you, John. Let me start by covering our acquisition
activity. During the quarter, we acquired eight properties
in several markets including Atlanta, Chicago, and New
Jersey. These acquisitions had an accurate cost of $85.7
million, adding 570,000 net rentable square feet for the
portfolio. Initial from occupancies of the properties
acquired this quarter ranged 66% to 80%. Average costs
were generally at or within 20% of replacement costs.
Through June 30, we completed the acquisition of 14
properties at an acquisition cost of $82 million and have
added 937,000 net rentable square feet for the portfolio.
Subsequent to June 30, we consummated the purchase of
three additional acquisitions in the Atlanta market. These
properties added 235,000 net rentable square feet of space
at a total cost of $18.2 million.
As of July 28, our acquisition pipeline includes 11
properties located in Atlanta, Charlotte, Florida, and New
York. Acquisition of all of these properties would add
886,000 net rentable square feet to our portfolio at a
total cost of approximately $120 million.
As a result of our Acquisition Team's efforts, for the
year, we have acquired or have under contract 28
properties, which would add two million net rentable
square feet to the portfolio at an aggregate cost of $220
million. Our acquisition properties continue to perform at
or above our expectations.
Competition for good properties remains challenging,
however, we have been fortunate to source a number of off
market transactions and we are working hard to maintain
our current pace of acquisitions.
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Now moving on to our development activities, during the
second quarter, we completed four projects with 214,000
net rentable square feet at an aggregate cost of $14
million. The projects include the expansion of one
existing facility, the conversion of two former pickup and
delivery facilities, and the completion of a ground-up
development.
At June 30 our development pipeline, which also includes
our expansions and repackaging properties, totaled $238
million consisting of 48 projects. These projects will be
fully funded by us over the next approximately 24 months
and will add $3.2 million net rentable square feet to the
Public Storage system.
With that, I will now turn the call over to Ron.
Ron Havner: Thank you David. Let me summarize for you where we see
Public Storage today. We are generating good rates of
return and growth on invested capital. Our unique,
scaleable platform is allowing us to drive efficiency into
both our operating and corporate cost structures, leading
to improved operating margins.
Our stable cash flows and relatively low leverage is
enabling us to continue to drive down our cost to capital,
generate significant free cash flow, and maintain
financial flexibility. Our brand name, media, and
promotional programs are helping us to produce industry
leading occupancies and growth in revenue per available
square foot.
It is also helping us to accelerate the fill-up of our
development and acquisition properties. Our customers are
benefiting from improved property staffing, strength of
our operating management, and continued investment in our
product through both CAPEX and redevelopment.
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Our continued focus on the three Ps: people, product, and
pricing, combined with our operating and financial
strategies are producing results for our shareholders,
customers and employees.
We are well positioned to capitalize on the opportunities
that come before us which leads me to our proposal to
merge with Shurgard.
This morning we announced that we had made a proposal to
Shurgard Storage Centers to merge our two companies.
Harvey Lenkin and I had met with Chuck Barbo and Dave
Grant in early July to discuss our proposal and review the
significant shareholder value creating benefits of a
merger. Since then we have also sent direct correspondence
to each of Shurgard's directors outlining our proposal,
describing how a merger would create significant
shareholder value, and offering to discuss or meet with
them.
Shurgard has refused to enter into discussions for a
combination of the two companies, telling us that quote,
"The company is not for sale."
Because of the significant opportunity to create
shareholder value for both Shurgard and Public Storage's
shareholders, we thought it appropriate to communicate our
proposal to you. Accordingly, today we filed an 8-K with
our proposal as outlined in the letter to Chuck Barbo and
Dave Grant on July 8, 2005, and Shurgard's July 26
response.
Our proposal is as follows: each share of Shurgard's
common stock will be exchanged for .80 shares of Public
Storage's common stock. This represents an implied value
of $53.40 per share of Shurgard's common stock, a 14%
premium based on Friday's closing stock prices.
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Based on first call estimates of FFO per share for Public
Storage and Shurgard, we believe this transaction to be
significantly accretive to Shurgard's shareholders. First,
on a pro-forma basis, Shurgard's shareholders can get an
additional 50 cents of FFO per share in 2005, and 25 cents
of FFO per share in 2006. These represent 24% and 10%
increases respectively above Shurgard's current first call
estimates.
Second, they would share in the realized synergy, both
revenue growth and expense reduction, in proportion to
their ownership percentage in the combined enterprise.
Once $20 million of synergies are achieved, the
transaction will become accretive to Public Storage's
shareholders and Shurgard's shareholders will benefit by
another ten cents per share.
The combination of our two companies will result in an
organization with these attributes. The total enterprise
value of approximately $15 billion with annual revenues in
excess of $1.5 billion. We would have ownership interest
in over 2,000 self-storage facilities containing
approximately 128 million net rentable square feet in 38
states and seven European nations.
There would be enhanced opportunities for revenue gains
from Public Storage's national marketing programs and
tenant insurance programs. The company would have
significant opportunities to reduce duplicate expenses
such as general and administrative costs, yellow pages,
insurance, MIS, and phone centers.
We would have the most experienced management team in the
self-storage industry, combining the strength and best
practices of both Public Storage and Shurgard.
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We would maintain a strong, flexible balance sheet which
would enable the company to easily raise low cost capital
for continued expansion in the United State and worldwide.
This should also provide for enhanced credit ratings for
Shurgard's creditors. We would have an ability to
capitalize on Public Storage's name in the US and
Shurgard's franchise in Europe.
Common shareholders of the combined entity should have
increased liquidity, and there would be significant
retained cash flow from operations to further finance
growth, due in part to making the transaction taxable. The
common dividend would be paid from cash flow, not
borrowings, and poised for growth.
At Public Storage we believe we are uniquely positioned to
extract maximum value from a combination of Public Storage
and Shurgard for the following reasons: Public Storage has
a long track record of creating shareholder value. Our
stock has consistently outperformed our peers and the
NAREIT and Morgan Stanley indices.
We have the financial strength to absorb Shurgard,
maintain our strong and flexible financial profile, and
easily access capital for continued growth. We have sound
financial systems which are Sarbanes Oxley compliant and
are scaleable to allow for quick integration.
Our present IT infrastructure is scaleable to multiples of
our current platform. Size and scope of our existing
operations would allow for substantial reduction in
general and administrative costs. Public Storage and
Shurgard operate in a number of the same markets such as
Chicago, Los Angeles,
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Dallas, and Seattle, which would facilitate a reduction in
duplicate operating costs.
Our media programs can be utilized in these same markets
with no incremental costs. For example, we would spend the
same dollars for TV in Seattle regardless of whether we
own 40 or 80 properties.
There are redundancies in the combined company's back
office support structure such as MIS, phone centers, and
accounting, which can be eliminated. At Public Storage we
believe that there are compelling reasons, both financial
and strategic, to combine Public Storage and Shurgard.
The merger will create an exciting global enterprise with
critical mass and leveragable strength that can achieve
superior revenue growth, lower operating costs, lower
capital costs, and improved operational efficiency.
In short, we're capable of delivering superior returns to
owners, more career opportunities for employees, and an
expanded platform combining best practices for our
customers.
We are hopeful Shurgard's shareholders will see the
benefits of this transaction and communicate their views
to the Board of Directors and senior management of their
company.
With that operator, let's open it up for questions.
Operator: At this time I would like to remind everyone if you would
like to ask a question please press star then the number 1
on your telephone keypad. We request that you limit
yourself to one question. For follow-up or additional
questions please re-enter queue by pressing star 1 again.
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Thank you. We'll pause for just a moment to compile the
Q&A roster.
Your first question comes from Eric Rothman with Wachovia
Securities.
Eric Rothman: Good morning. I guess my first question would have to do
with how much have you spent thus far pursuing this? And
how much do you expect to spend and do you think it will
be a material expense?
Ron Havner: Well we haven't spent a significant amount to pursue it so
far. As indicated, we've been to Seattle and obviously
we've hired some advisors to assist us. In terms of the
course or cost going forward that will really depend on
the direction and actions of the Shurgard management team,
Board of Directors.
Eric Rothman: Thank you very much.
Operator: Your next question comes from Greg White with Morgan
Stanley.
Greg White: Good morning guys. Ron can you give us a little
more color - when you met with Shurgard, was it sort of a
blatant, you know, hand in the face no interest? Or was
there discussions about at a price they would be more open
minded?
Ron Havner: Well Greg I think there's two letters attached to the 8-K.
Greg White: Yeah and I read those.
Ron Havner: Okay well the letter that we sent from the meeting
that Harvey and I had basically outlines the discussions
that we thought we had with the Shurgard management team.
And there were really no subsequent discussions since that
time other than Shurgard's letter back to us which is
attached.
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Operator: Your next question comes from Michael Knott with Green
Advisors.
Michael Knott: Hey good morning. Just curious why you don't go tender and
what hurdles you might see if you do pursue that?
Ron Havner: Well Michael I think we're fairly well aware of our
options. Our real desire is to sit down with the senior
management team of Shurgard and have positive,
constructive discussions and negotiations to try to put
these two companies together. And realize the benefits of
this merger for both sets of shareholders.
Operator: Your next question comes from Dan Sullivan with Wachovia
Securities.
Dan Sullivan: Good morning guys. A quick question - if you are
successful in merging with Shurgard, do you expect that
you're going to change your capital plan going forward?
And specifically issuing debt, or are you going to still
remain with issuing perpetual preferred securities as your
primary way of raising capital?
Ron Havner: You know, Dan, at this juncture we remain flexible.
Shurgard has a fair amount of short term debt that needs
to be refinanced. And historically Public Storage has used
perpetual preferred stock to leverage its capital
structure as well as retain cash flow.
Dan Sullivan: So then no definitive plans at this time? You're still
kind of mulling it over?
Ron Havner: We want to remain very flexible.
Dan Sullivan: Okay, thanks.
Operator: Your next question comes from Michael Mueller with JP
Morgan.
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Michael Mueller: Yeah hi. Ron what's your impression as to why their
occupancy is so much lower than yours?
Ron Havner: Well Mike I really wouldn't want to speculate on that. I
know what we're doing to drive our occupancy and it's the
combination of our media programs, promotional programs,
as well as executing out at the field level. That's what
we're doing. We're pricing better than we have before, our
media programs continue to get better, and you're seeing
that in the operating results.
Michael Mueller: Okay, okay. Thanks.
Operator: Your next question comes from Eric Rothman with Wachovia
Securities.
Eric Rothman: Yes, just wanted to be clear - do you own any shares of
Shurgard today? And have you requested a waiver or..?
Ron Havner: Yeah I really don't want to talk about that.
Eric Rothman: All right. Thank you.
Operator: Your next question comes from Greg White with Morgan
Stanley.
Greg White: I guess it takes a shorter time to queue up here. Harvey
can you Ron can you talk about the reason why it's so
important that it's a taxable event for you guys in the
stepped up basis?
Ron Havner: Yeah Greg. One of the things in a, you know, it's limited
in terms of the amount of cash flow that it can retain...
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Greg White: Right.
Ron Havner: Essentially by depreciation...
Greg White: Right.
Ron Havner: Okay. And so by having a stepped up tax basis in the
Shurgard assets that will allow a significantly greater,
we believe significantly greater cash flow retention than
if there's not a step up in the tax basis which will
enhance the financial flexibility of the combined
enterprise going forward, and its growth ability.
Greg White: So it doesn't have anything to do necessarily with the tax
implications for Shurgard unit holders if you were to sell
some of those assets.
Ron Havner: I don't think so Greg. But I don't know the attributes for
the Shurgard unit holders.
Greg White: Okay. All right, thanks.
Operator: Your next question comes from Edward Wu with Reservoir
Capital.
Edward Wu: Good morning gentlemen. What are the regulatory hurdles
that would have to be met before this merger could close?
Ron Havner: You know, I think if Shurgard's board and management were
to sit down and talk to us we've got a good shot of
closing this transaction by the end of the year. And
there's no unusual regulatory obstacles that we know of at
this time.
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Edward Wu: But you would need to file Hart-Scott-Rodino.
Ron Havner: Possibly. Again, you know, there's nothing unusual here in
this proposed transaction that we're aware of that would
have any unusual regulatory obstacles. And you know, if we
can sit down at the table and start a conversation with
the Shurgard management team sooner rather than later we
have a shot at closing by the end of the year.
Edward Wu: Thank you.
Operator: Your next question comes from Drew Figdor with Tiedemann.
Drew Figdor: Yes. I just wonder if you could clarify, they've already
I guess rejected twice. Once in the letter and then once
again already today fairly clearly saying that they're not
interested. And you've missed, I guess, the annual
meeting. So what options are available for you to pursue
this? And if management decides not to sit down and talk
with you, is that the end of your interest?
Ron Havner: You know, first, I haven't read their press release so I'm
not familiar with what it says. We're pretty well advised
here and pretty well aware of the options that are
available to us. Our sincere hope, however, is that
Shurgard board and management will sit down and talk with
us about putting these two companies together.
We're also hopeful and that's one of the reasons for this
call is that the Shurgard shareholders will encourage both
the board and the management to do just that.
As you probably know, Shurgard recently declassified their
board as well.
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Drew Figdor: Right. Right. For next year, I guess.
And if they refuse to sit down with you, are you still
committed to this process?
Ron Havner: You know, we're well advised and I think we're pretty
familiar with all of our options.
Operator: Your next question comes from Patrick Stotesbery, a
private investor.
Patrick Stotesbery: My question is the effect on the income stream for
Shurgard shareholders by doing a taxable transaction and
leaving them with a tax liability and no cash to pay.
Ron Havner: And your question is?
Patrick Stotesbery: What's your thinking on that?
Ron Havner: Well, one of the - I don't know whether you heard one of
the earlier questions about the rationale for making the
transaction taxable. It is so that there's a step up in
the tax basis of the assets and so that the enterprise
going forward has greater ability to retain cash flow.
I believe if the - and this is not tax advice. If the
transaction would be subject probably to long-term capital
gains, which are probably at their historical low.
Patrick Stotesbery: Thank you.
Operator: Your next question comes from Lou Taylor with Deutsche
Bank.
Page 21
Lou Taylor: Yes. Thank you.
Just you guys have been down this road before, what gives
you optimism that the outcome here will be different than
prior discussions?
Ron Havner: Well, the reasons for this transaction, this merger in
particular at this time, as we've outlined, I think, are
extremely compelling. We're counting on the Shurgard
shareholders to make their voice known to both the board
of directors and senior management of Shurgard but as we
touched on there's a number of reasons why this
transaction makes sense for both sets of shareholders.
You know, and we have done one of these before. I think
back in 1999. We merged Public Storage merged with Storage
Trust. So we've done these kinds of transactions before.
Operator: Your next question comes from Greg White with Morgan
Stanley.
Greg White: Ron, can you - you sort of touched on it. Can you
give us a little bit of history here as to how many times
you might have approached them in the past and what
responses you've had?
Ron Havner: Well we've had I think Chuck Barbo and Dave Grant have
known over the years that this is a transaction that we
here at Public Storage thinks makes sense. We really
formally approached them here in July and outlined a very
specific proposal, which was a part of our letter that is
in the 8-K.
Operator: Your next question comes from Michael Knott with Green
Street Advisors.
Page 22
Michael Knott: Yeah. Just curious if you can comment a little bit on
your interest in Europe specifically with regards to the
offer for Shurgard and then just generally more interest
in just globally in general?
Ron Havner: Well, with respect to Europe, Michael, I think, as you
know, Shurgard has about 130 properties over in Europe.
And while Europe is potentially a great opportunity,
potentially it would represent about 6 or 7% of the
combined portfolio. And our gut here is it would need to
really be expanded significantly to become efficient. And
the combined entities capital structure allows for that.
In the immediate future, I think Europe would benefit from
our promotion and media programs. The last I looked the
mature properties over there were about 70% occupied. So I
think our media promotional programs as well as our, you
know, our managerial techniques for, you know, getting
customers into space would benefit Europe quite
measurably.
In addition, we'd probably seek to kind of rationalize the
cost structure over there and make it a little more
efficient.
Michael Knott: Thank you.
Operator: Your next question comes from Brian Jones with Neuberger
Berman.
Brian Jones: My question is basically been asked and answered so thank
you.
Ron Havner: Okay. Thanks.
Operator: Your next question comes from Edward Wu with Reservoir
Capital.
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Edward Wu: Yeah. Gentlemen, just a follow up on clarification. You
had mentioned the Storage Trust transaction. I think I
missed the context. Were you specifying that because that
was also an unsolicited proposal or was that a friendly
merger at the time?
Ron Havner: It was initially an unsolicited proposal that subsequently
turned friendly.
Edward Wu: Okay. Thank you.
Operator: Your next question comes from Eric Rothman with Wachovia
Securities.
Eric Rothman: Yeah. I guess we would be remiss if we ignored your
second quarter results.
Ron Havner: Great.
Eric Rothman: With respect to the margin expansion, how much of that
is permanent do we expect to see going forward? There
were, it looked to me as though there were maybe a number
of things that could have been timing related with respect
to repairs and maintenance. As well as a few other things
that may be more permanent, in particular the labor saving
hours and the lower increase in payroll than we might have
otherwise expected. What should we look for, for margins?
John Reyes: Well, Eric, this is John. I can give Ron a break here. I
think we're shooting to expand our margins and continue to
have the positive trends that we've experienced. But with
that said, the 1% increase in expenses that we had in the
quarter, although it's very good for us, I think overall
what we are looking for, for the next probably two
quarters out is we probably will not experience a 1%
growth. The expense growth will probably be a little
higher than that.
Page 24
And part of that is, is that what you're seeing here is
the results of some of the initiatives that John mentioned
as well as others that started in the latter half of 2004.
So the comps between 2005 and the first half of 2004 have
been a little easier to come by. But when we start moving
into the latter half of 2005, comparing up to 2004 is
going to get a little tougher. So that I expect that our
expense growth is going to trend up off of the 1%.
So I think the margins - the gross margins will probably
come under a little bit of pressure as we move forward but
you know, we think that we can continue to try to at least
stabilize them at this level and perhaps grow them a
little bit.
Eric Rothman: With respect - specific respect to the phone
reservation system, I know that you'd mentioned that
last quarter that most of the savings that we've seen
there was going to be in the first and second quarter. Are
we completely done with that on a similar vein to the
margin expansion issue or is there a little bit more of
that to do.
John Reyes: That is part of it. In fact, that's one of the big
pieces. But I think, again, as we go forward, the
reduction in phone center costs, the percentage reduction
is going to start slowing down. And you can already start
seeing that. With the first quarter the reduction was much
bigger than the second quarter and again, as we move on
through the year, the reduction - the year over year
reduction will start diminishing.
Eric Rothman: Right. And then just one last if I may. Insurance costs.
Most folks are seeing those rise. Yours were down. Is
there anything in particular driving that?
Page 25
John Reyes: Nothing special. Just for us, it's just a softer
insurance market. So we've been benefiting from that.
But nothing really with respect to property insurance
that's there, you know, causing that.
Eric Rothman: Right. Thank you very much.
John Reyes: You're welcome.
Operator: Your next question comes from Michael Mueller with JP
Morgan Securities.
Michael Mueller: Hi. Two things also on the quarter. First, it looks like
the tenant reinsurance costs were half of what they've
been in prior quarters. And I just want to confirm when
you were talking about a 6.1% yield, was that I think 858
million, is that referring to the unstabilized pool of
development properties?
John Reyes: Yes. To the answer to your second question, yes. That 6.1
and the costs relate to the acquisitions and development
properties. So yes, they're the unstabilized piece of our
portfolio.
Michael Mueller: And last quarter that was 500 million, right? And the
yield was also 6%. So...
John Reyes: Right. I mean part of it is because although we've been
experiencing growth in some of the older assets, in
some of the newer assets that we've been acquiring, are
basically - a lot of them are still fill up type
properties.
Michael Mueller: Okay. Okay.
And then what about the tenant insurance?
Page 26
John Reyes: The tenant insurance, one of the things that happened to
us last year we became very inefficient in how we were
processing our tenant claims. We changed our processing
agent and got a lot of benefit out of that.
The other big component that happened during this quarter
was something that actually started last year with respect
to the hurricanes. If you recall when the hurricanes came
through in Florida, in the month of September we accrued
about a million and a half of liabilities for expected
costs expected to be experienced with respect to tenant
claims.
To date, we've only paid about a half a million dollars of
those claims and there's some still in the queue. So one
of the things that we needed to redo is reduce the
original accrual of a million and a half and we reduced it
by about a half a million dollars, which resulted in a
reduction of the expense for the quarter.
Michael Mueller: Okay. And that will recur?
John Reyes: Well, possibly not because we still have a few
claims to pay still. There's still another half million on
the books to go. If none of that materializes then yes
there will be about a half a million dollar reversal but I
don't expect that to happen.
Michael Mueller: Okay. Thanks.
Operator: Your next question comes from Rob Davis with PSAM.
Rob Davis: Hi. Good afternoon. Good morning.
Page 27
Just had a question regarding synergies. You mentioned
that once synergies exceed $20 million, which kind of
leads me to infer that you're looking for something better
than that. Looking at Shurgard's SG&A from last year, I
think it was about $32 million. It would seem to imply
that synergies would probably eat up the vast portion of
G&A and probably a large portion of that coming from the
U.S.
I guess more qualitatively where should we kind of look to
see where there would be synergies? Is it mostly SG&A? Is
there any other places where you think you can achieve
savings?
Ron Havner: Well, let me try to step through some of them. You've got
an enterprise with revenues of about a billion five. So
20 million of revenue synergies or benefits by injecting
media and promotional programs into the program would be a
positive. That, you know, that's less than 2% of revenues.
On the expense side, as you touched on, you're right. I
think the combined enterprise would have SG&A of 50 to 60
million and we would look to take that down on a combined
basis. Shurgard operates, I think, with about 150, almost
200% of the G&A that we operate here with Public Storage.
So there's certainly an opportunity.
At the operating or unit level, you've got things like
yellow pages where Shurgard say has a double truck ad in
Seattle with their 40 properties. If we have a double
truck ad, which maybe cost $100,000 for our 40 properties
in Seattle, on a combined basis you put those together and
you've got 80 properties in one double truck ad.
You've got duplication of supervisory personnel. Shurgard
has a call center. We have a call center. Those could be
combined as well as, you know, the
Page 28
property insurance, supervisory personnel. So there's a
whole variety of things that can be combined at the
operating level.
This won't happen on day one but it will take time to
realize that there are definite cost synergies to be
realized.
Rob Davis: As you mentioned, just to make sure I understand from the
first thing you said, there probably are some revenue
benefits from I guess better media and promotional
activities?
Ron Havner: Yeah. I believe so. The Shurgard system does not utilize
television that I know of. And as I've touched on, when we
go on TV in Seattle, whether we're covering 20 or
40 properties in Seattle, it costs the same. But also if
you look at the occupancy levels between the two
portfolios, it's somewhere - I don't know what the
Shurgard's June 30th results are but the last I looked, it
was somewhere between 500 and 700 basis points. So there's
an opportunity to drive the utilization rate on those
assets higher.
Rob Davis: Uh-huh. In terms of the portfolio, are there, you
know, I've done a little tweaking here and there, any
plans to change what they have in their asset base, get
rid of things you think might be underperforming and beef
up in certain areas?
Ron Havner: I couldn't comment on that. We - you know, we haven't been
through, in terms of a strategy or in terms of what to
combine. Historically, Public Storage is not a seller of
assets and we think the portfolios overlay each other and
are complementary to one another.
Rob Davis: Okay. Thanks very much for your answers.
Page 29
Ron Havner: Uh-huh.
Operator: Your next question comes from Steve Sakwa with Merrill
Lynch.
Steve Sakwa: Good afternoon. Ron, I guess you sort of touched on
the question I was going to ask about kind of the revenue
and Shurgard's occupancy is substantially lower than
yours.
I mean is there anything sort of structural about the
assets or locations that would lead you to believe that
you wouldn't get those assets closer to yours and, you
know, as a, I guess, an adjunct to that, and they also it
looks like have substantially or at least 10% higher rents
than you do and I'm wondering if there's a trade-off
between sort of them taking higher rents and lower
occupancy and whether you think you can hold that rate or
whether some of that would come out?
And then also, I just wanted to talk about conversion and
assuming that you would ultimately switch these over to
the Public Storage name, you know, what costs are involved
in doing that?
Ron Havner: Steve, there's a lot of questions there, buddy.
Steve Sakwa: Right.
Ron Havner: Let me try to touch on kind of the occupancies and rates.
As you said, the occupancy spread between the two
portfolios is quite substantial. We don't - the last I
looked, Shurgard doesn't break out their occupancy by
market as we do in our 10-Q and 10-K so it's a little hard
to do apples to apples what they're doing in Seattle
versus what we're doing in Seattle or Dallas and Dallas.
But overall, the portfolio, you can see the widespread in
occupancy.
Page 30
In terms of rental rates, we don't disclose our street
rates or our posted rates either in the Q or in the press
release. So I'm not sure how you're concluding that our
rates are higher or lower than their rates. So I'll leave
that as it is.
In terms of REVPAR growth, which is a mixture of volume,
rates, and promotional discounts which at the end of the
day is really how much cash is coming in the door, I think
our numbers have been pretty good, they're certainly very
good here in the second quarter and if not number one in
the industry are pretty close to number one in the
industry in terms of their REVPAF growth that we're
achieving.
Steve Sakwa: Well, Ron, I don't know if you can still hear me but
you've disclosed that you are sort of REVPAF or, you know,
the revenue per occupied foot is 1,051 on your same-store.
And if I'm reading their results correctly, from the first
quarter, it looked like their REVPAF or - well, I guess
their annualized rent is 1,181. So...
Ron Havner: Well, you've got two different things there, Steve, in
terms of the last time I looked at their press release.
Their disclosing as we've disclosed what the in-place
rents are which are the leases in place. REVPAF is a
combination of what is the revenue for the period, which
is leases in place net of promotional discounts as well as
per available foot. So if you're high rents low occupancy,
those counter-balance each other.
Steve Sakwa: Okay, thanks.
Operator: Your next question comes from Rick Murray with Raymond
James.
Page 31
Rick Murray: Hi. Good morning, guys. I've also got Paul Puryerar here
with me; I think he has a question as well. I was curious
about your outlook for Europe and what kind of potential
returns you're targeting there and kind of how they stack
up relative to what you're seeing in the States today?
Paul Puryerar: You know, there's certainly potential opportunity in
Europe. And in terms of macro economic outlook of Europe
or what is the grand potential of Europe, it's a little
hard to say. You know, earlier, I touched on the fact that
Shurgard has 130 properties scattered throughout seven
European nations. But occupancies have not been, I don't
think what they've anticipated, and it's certainly not
what we would anticipate. Again, I think that portfolio
could benefit from our promotional and media programs.
There's certainly opportunity there. There's a number of
other players besides Shurgard that have gotten into
Europe in the last four or five years. So if the - an
evolving product type in Europe, customer awareness is
still very low. And I believe it will take a significant
amount of expansion and media programs to drive customer
awareness and utilization of the assets.
Rick Murray: Okay, thanks.
Paul Puryerar: Yeah. Ron, if you could - we're just taking down notes
here trying to put together what your savings are in G&A
and operating costs. Could you just summarize that for us
and sort of help us get to some order of magnitude of
numbers here?
Ron Havner: I don't - Paul, I don't remember quantifying it for you by
line item. As I - an earlier gentleman asked about kind of
the opportunities both at the operating level as well as
the G&A level. You can look at the two companies'
respective G&A and kind of draw your own conclusions in
terms of what the
Page 32
ongoing run rate is. But certainly, even a casual observer
would see a lot of upside potential in the G&A line.
As I touched on the yellow pages, the operating costs, the
systems costs, the call centers, those are not delineated
by Shurgard in their release of public financial
information so it's a little hard to give you direction in
terms of what to look at, what they're spending versus
what we're spending. But you can look at what we're
spending and kind of draw your own conclusions and
extrapolate there, I think.
Paul Puryerar: Yeah. Okay, thanks.
Operator: Your next question comes from William Acheson with Merrill
Lynch.
William Acheson: Thank you. Traditionally, guys, you guys always say that,
you know, you don't focus on cap grades or like that. But
I was wondering that since this is essentially a very
large acquisition, at the pricing inferred here, $53, do
you think that's still below replacement cost?
Ron Havner: No, Bill.
William Acheson: Okay. How much due diligence were you actually able to do
here I mean given Shurgard's disclosure?
Ron Havner: Just public information.
William Acheson: Okay. Thank you.
Operator: Your next question comes from Eric Rothman with Wachovia
Securities.
Page 33
Eric Rothman: Yeah. With respect to occupancy being over 90%, are you at
the point where you're seeing pricing power return or at
least discounts completely ebbing and how much pricing
power do you expect to have over the next...?
John Reyes: We're seeing both that. We're seeing - and it varies
property by property within markets where we've been able
to raise rate, not only to existing tenants and as well as
to new tenants and then at the same time, we've been
reducing promotional discounts at some properties. It just
really depends on - and it's done on a
property-by-property basis.
So we've seen a lot of properties with - what we do have a
lot of pricing power and then, of course, there's some
properties where pricing is still very, very sluggish at
this time.
Eric Rothman: Do you have any guess as to how much you could drive rates
with the combined company?
John Reyes: It's tough to say. I mean we don't know enough about their
properties. As Ron said, most of the due diligence that we
did was through public stuff. We kind of have a feeling by
the markets in which they operate and how our properties
do in those markets but we haven't quantified anything at
this point in time.
Ron Havner: We do have a sense that there are both cost synergies and
revenue synergies to be gained in the combined
organization. We've touched on Europe. We believe - if you
look at the GAAP in occupancies here in the U.S., their
portfolio would benefit from our promotional and media
programs as well in addition to the cost synergies that
we've been through a couple of times here on the call.
Page 34
Eric Rothman: Great. Thank you.
Operator: Your last question comes from Michael Mueller with JP
Morgan Securities.
Michael Mueller: Thanks. I was wondering, can you tell us what the assumed
occupancy was and your pro forma? And then also, I think
Steve asked a question earlier about the cost to reflag
property and I was just wondering if you could comment on
that?
Ron Havner: The pro forma, Mike, I referred to in my call - or first
call estimates for both Public Storage and Shurgard. Okay?
But we didn't refer to our own separate pro formas. I used
the first call estimates that are widely published by guys
like you.
Michael Mueller: Okay.
Ron Havner: With respect to the cost to reflagging properties, that
can - depending on the store layout, the signage, and all
that, that can be modest to up to, you know, $75,000 to
$100,000, it varies across the board in terms of the
physical condition of the product, the store layout, and
all those things.
Michael Mueller: Okay, and you wouldn't do Europe, just the U.S.?
Ron Havner: Do what in Europe?
Michael Mueller: Reflag?
Ron Havner: Haven't decided yet.
Michael Mueller: Okay. Thanks.
Page 35
Ron Havner: Okay, operator. Thank you all for your participation in
our conference call.
Operator: Thank you. This concludes today's conference call. You
may now disconnect.
END
Additional Information
Subject to future developments, Public Storage may file with the United States
Securities and Exchange Commission a registration statement to register the
Public Storage shares which would be issued in the proposed transaction.
Investors and security holders are urged to read the registration statement
(when and if available) and any other relevant documents filed with the
Commission, as well as any amendments or supplements to those documents, because
they will contain important information. Investors and security holders may
obtain a free copy of the registration statement (when and if available) and
other relevant documents at the Commission's Internet web site at www.sec.gov.
The registration statement (when and if available) and such other documents may
also be obtained free of charge from Public Storage by directing such request
to: Public Storage, Inc., 701 Western Avenue, Glendale, CA 91201-2349,
Attention: Chief Legal Officer.